July 3, 2022

Finance & Economy

Let's Talk About Investment

How High Will 3Q GDP Be? It’s Anyone’s Guess | Economy

For weeks, economic forecasters have been ratcheting down their forecasts for how strong growth in third-quarter gross domestic product will be when the government reports the official advance estimate on Thursday.

Following the first two quarters of the year when the annual rate of growth came in at 6.3% and 6.7%, the arrival of the delta variant this summer and ongoing disruptions to the global supply chain have resulted in a slowing of the economy both at home and abroad.

Add in inflation that is proving more than “transitory,” as Federal Reserve Board officials predicted earlier in the year, and some forecasters are even dusting off the 1970s term “stagflation,” which is a combination of low growth and high inflation.

The most recent consensus estimates from the Conference Board, updated in mid-October, peg the number at 3.5%. Other private forecasts have the number marginally below 3%, around 2.9% to 2.8%.

Political Cartoons on the Economy

“This forecast is a downgrade from our September outlook and incorporates the larger-than-expected impact that the COVID-19 Delta variant has had on the US economy,” the Conference Board wrote. “Looking further ahead, we forecast that the US economy will grow by 3.8% (year-over-year) in 2022 and 3% (year-over-year) in 2023.”

But a closely watched measure from the Federal Reserve Bank of Atlanta that is more of a running estimate than a forecast is more downbeat, currently showing a paltry 0.5% – down from 6.1% in late July.

Much of the adjustment comes as economists predict consumer spending, accounting for more than two-thirds of the U.S. economy, will prove less robust given recent readings that suggest consumers are skittish over rising prices, shortages of goods and the delta variant.

“However, as the severity of the Delta wave continues to ebb we expect spending on in-person services to reaccelerate in the final months of 2021,” the Conference Board noted in its revision.

The economy is enduring a tug of war between continued strong demand among consumers and the specter of stickier inflation and shortages of goods. The latter has been exacerbated by the fact consumers have shied away from services due to the coronavirus and spent more on durable goods, which are more susceptible to the supply glitches.

The good news is that the twin factors most affecting the economy – COVID-19 and supply of goods – are expected to improve in the coming months. Increased vaccinations and seasonal trends are already reducing the cases of coronavirus and, with various booster shots now becoming available to a wider population, people should feel more comfortable getting out and spending money.

“If COVID19 infection rates continue to decline and if supply-chain disruptions decline over the next 6 months (as we expect), then output should rebound,” Hugh Johnson of Hugh Johnson Advisors, said in an email Tuesday. “We anticipate that Q4 real gross domestic product will expand 4.9%-5.1% versus 2.8% for Q3.”

Chris Gaffney, president of World Markets at TIAA Bank, dismisses the talk of stagflation and says growth in the economy is being “spread out” following the strong rebounds in the first half of the year.

“I think the number will come in below expectations, but I think growth is going to continue,” Gaffney says. “Inflation, I think, is going to ease back. Wage inflation – that’s sticky, but that’s good inflation. It gives consumers more money to spend.”

The debate is more than an academic exercise. The Fed will be looking at the makeup of the numbers closely. The central bank has indicated it plans to dial back the extraordinary support it has provided during the pandemic, purchasing $120 billion per month in Treasuries and mortgage-backed securities.

The Fed may announce more specific details of its plan next week when it meets. Expectations are that it will cut the purchases by $15 billion per month with a goal to eliminate them by the middle of next year. But the Fed does not want to be tightening monetary policy if the economy is on the brink of a bigger slowdown. At the same time, if inflation gets a stronger hold on the economy, then the Fed will face pressure to raise interest rates sooner than expected in 2022 or 2023.

“The Fed is in a difficult situation right now,” LPL Financial Fixed Income Strategist Lawrence Gillum wrote Tuesday. “Do they raise rates to address inflation concerns, potentially choking off economic growth? Or do they continue to let inflation run hotter than it has historically to let the economy continue to recover? We think the Fed is likely to be more patient in raising rates than markets are currently expecting.”